in Mobile Gaming

#G5 Entertainment: The future looks bright

Our top-pick G5 Entertainment released its preliminary FY 2012 numbers this morning. The company has not yet received all Q4 2012 reports from all distribution channels but based on the information available, for the period of January-December 2012, the management forecasts revenue of 80 MSEK, with operating result of 25 MSEK, and earnings per share of 2.7 Kr. This corresponds to achieving 72% revenue growth and 42% operating result growth compared to the same period of 2011. This compares to the company’s previous goal of revenues of SEK 87m and an EPS of SEK 3.2, which was however set in September 2011 and the development during the first 9-months of 2012 already indicated that the EPS would end up closer to SEK 2.80 than anything else. G5 Entertainment will release its full year report for 2012 on February 25.

What’s somewhat disappointing is that Q4 2012 revenues came in at around SEK 20m, down from SEK 24m in Q3 2012. This comes dispite the fact that December holiday sales have been very successful and the market as a whole increased by around 70% during Christmas. October and November, however, were slower months, as we had seen in our rankings check and apparently December could not make up for the lost ground. In terms of EBIT margins, Q4 2012 was the best quarter since Q3 2010 and reached 44%. The full year EBIT margin of 31% marks a decrease compared with 2011 levels of 37%, as 2012 was a year of heavy investments into new games.
In today’s press release, G5 Entertainment says that with the start of the holiday period in December 2012, the group’s daily sales grew 60% from pre-holiday average, when comparing two weeks before and after the start of holidays. The increased level of daily sales continued into January 2013.

Vlad Suglobov, CEO, comments: “Once again holiday season set another record for G5. People around the world unpacked smartphones and tablets they received as gifts and rushed into the application stores to download games. As a result, millions of new players were introduced to G5’s large portfolio of family-friendly games, and daily sales set a new record.”

2012 became the third year of G5’s fast-paced growth in smartphone and tablet games publishing business, and the group invested record amounts into the development of new games for release in 2013 and 2014. As the market of smartphones and tablets goes from strength to strength, the management aims to eventually achieve revenue of 300 MSEK with operating result of 100 MSEK, while keeping the growth at historic 2010-2012 levels (on average around 85% p.a).

The real positive news in today’s release is the announcement that the Board of Directors of G5 Entertainment has decided to apply for a listing of the company’s shares on NASDAQ OMX Stockholm in the second half of 2013.

We have argued for quite some time that a listing on the NASDAQ OMX Stockholm will increase opportunities for institutional investors to invest in G5 Entertainment, not the least also foreign investors. We have noticed big interest for the case from countries other than Sweden and those investors will finally be able to buy into this fantastic growth story.  Such a listing is also another proof of quality for the company in terms of its operations and information disclosures and should also once and for all stop the questioning of its accounting methods.  G5 also states today that in parallel to the listing process the company will review its capital structure to ensure that the right conditions are in place to capture future growth opportunities.

We reached out to CEO Suglobov and got the following comments from him:

We had a great holiday season and great start of 2013. January will most probably be a record month for G5 – higher than Q3 2012 months. Please note that 87M “goal” for 2012 was defined back in September 2011 – several month before the period even started, and this is in volatile hi-tech games business. We aimed at this number but always said it may come in higher or lower. In any case, what is important is that the company delivered great growth – once again – for the third year – and I think it is important to look at the whole track record for the past 3 years, and focus on where the company is going to be at the end of 2013.

I do not think G5 underperformed in Q4. What happened is that Q3 received a great boost from a very successful update of VCP. F2P has enormous potential and sales per game are much higher than with unlockable games, and big success with VCP had very pronounced effect on one quarter. If we take that unforeseen substantial success with VCP in Q3 out, we would see smooth quarterly revenue growth Q3 to Q4. In other words, for some time, one can expect a bit more volatility in G5 quarterly figures as we are rolling out more F2P games, as they have such disproportional effect on sales compared to unlockable games. Q4 was a great quarter for G5, but Q3 was even better because of our F2P experiments.

As far as I know, many other publishers and developers have experienced Q4 seasonality this year. This is more pronounced effect we have witnessed in previous years. In October and November, people seem to save money in order to prepare for holiday season. This is also the most busy period of the year, and people don’t have a lot of time to spend on playing with their smartphones and tablets. But on 24/25 the picture changed dramatically and our daily sales went up to new records. We expect the seasonality to become even more pronounced: winter and summer would be most busy and successful as people are using their devices more, and spring/fall are the seasons when people tend to spend their time elsewhere or save for winter/summer holidays, respectively.

I am very satisfied with G5’s performance in 2012 and especially in January 2013 so far, and I am focusing on our goal of 300 MSEK revenue and 100 MSEK operating result. We will do our best to continue growing quickly and profitably in 2013. We have many great games to release this year.”

We at Nordic Investor think that the time has come to focus on what’s ahead of us. 2013 will be yet another exciting year for G5 Entertainment and its shareholders. Assuming growth of around 80-90% during 2013, we believe G5 Entertainment will be able to generate SEK 4,50 – SEK 5,00 in EPS. Short-sighted traders are currently selling down the share to SEK 44, which implies a valuation of below 10 times forward-looking earnings. Once the share is trading on a “real” list, we believe a valuation of 20x is more reasonable. International investors will look at peer group valuations and notice the enormous discount G5 is trading at compared with other mobile gaming companies. The future looks bright.

Nordic Investor

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